Did you really think that Chesapeake (NYSE: CHK ) CEO Aubrey McClendon was likely to take last week's slap-on-the-wrist demotion seriously and immediately become a Boy Scout? If you were possessed of that assumption, it's clearly time for a re-evaluation.
As recently as Tuesday, hard on the heels of his removal as chairman of Chesapeake's board, it was disclosed that in recent weeks, as his situation at the Oklahoma City company was headed for the proverbial fan, he'd taken out a loan over and above those that had already been publicized. The latest borrowing, totaling $450 million, came from EIG Global Energy Partners and was secured by yet-to-be-drilled Chesapeake wells in which McClendon had a personal stake.
Loaned up to the gunnels
Coincidentally, EIG was in the process of arranging a $1.25 billion financing deal for Chesapeake at the time of McClendon's most recent borrowing from EIG. The CEO's latest loan was originally to have totaled $750 million, but was shimmied down when it became clear that Chesapeake's board was about to put the kibosh on a McClendon perk that permitted him to participate personally to the extent of 2.5% in the company's wells. It now appears that McClendon has taken down loans totaling $1.33 billion from EIG, despite -- or more likely because of -- Chesapeake's relationship with the Los Angeles company.
They just keep coming
Amazingly, this latest loan caper isn't the only questionable event to have surfaced at Chesapeake after the chairman's rug was pulled from beneath McClendon just last week. Beyond that:
- Soon after the company's release of its quarterly results and related call with analysts it was disclosed that McClendon and the company's other co-founder -- and now SandRidge Energy (NYSE: SD ) CEO -- Tom Ward had run a $200 million hedge fund on the side between 2004 and 2008. That discovery raises a host of questions, including whether the pair profited personally from non-public information garnered from their vantage points at Chesapeake.
- Chesapeake has become the target of a lawsuit by a disgruntled shareholder who contends that the use of the company's jets by executives and outside directors for personal travel has been systematically understated.
- McClendon unloaded $88 million of his own oil and gas interests to a Wachovia investment vehicle just three weeks after the same entity had acquired $600 million of Chesapeake assets.
For those acts, and earlier apparent acts of malfeasance, Chesapeake and McClendon have been targeted for an "informal" investigation by the Securities and Exchange Commission. In addition, Fitch Ratings has revised Chesapeake's outlook to negative, while retaining the company's default BB rating.
The unfortunate aspect of all this, at least from stockholders' perspectives, is that, despite his now apparent flaunting of ethics, McClendon has in many respects built a stellar corporation from its Oklahoma City headquarters. As I noted in a Motley Fool piece just last summer:
When looking at the major plays, Chesapeake demonstrates impressive acreage position. For instance, it controls 600,000 acres in the Eagle Ford, 800,000 in the Niobrara (both hot, liquids-rich plays), and 1.2 million acres in the massive Utica Shale. And it can legitimately be credited with discovering four U.S. unconventional plays -- including the Haynesville Shale, which leads all others in production -- and the Utica Shale.
But I clearly should have lent more credence to the then-well-known unscrupulous events that had already occurred at the company. As you likely know, in 2008, for instance, when Chesapeake's share price tumbled, McClendon was forced to meet a $552 million margin call, thereby wiping out 94% of his Chesapeake holdings. However, his financial "owie" was promptly assuaged by the board, which beneficently gifted him with a $75 million "well cost and incentive award." And for good measure he was handed another $12.1 million for his antique map collection that the board obviously coveted.
Time to pound in a "For Sale" sign
So now, McClendon and his compliant board have had far too many chances to discover the necessity of ethics in running a public company. At the very least, the CEO, his CFO Domenic Dell'Osso --and likely others among the officer corps -- and the entire board of directors should be swept aside and bid an immediate au revoir.
But that would require a herculean and likely precarious transition. Almost certainly a better approach would be one propounded by my capable Foolish colleague Joe Magyer, who believes that the company should be put on the block forthwith, with an eye to enticing such potential buyers as France's Total (NYSE: TOT ) or Royal Dutch Shell (NYSE: RDS-B ) . I'm inclined to add to Joe's suggestions the well-managed Chevron (NYSE: CVX ) , which thus far has been relatively tentative toward U.S. gas plays.
The Foolish bottom line
I nevertheless concur that his proposal probably constitutes the only realistic fate for the badly sullied company. In the meantime, I'd urge you to keep Chesapeake at arm's length from an investment perspective, watching it largely for its pathetic entertainment value.
After all, I'm as yet unwilling to wager one red cent that McClendon's final offense has been uncovered. As such, I'd urge you to keep abreast of this unfolding saga by simply clicking here to add Chesapeake to your version of Motley's My Watchlist.
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